After years of market de-rating – following a shift by global investors away from ‘all things China’ - the Chinese equities market has become one of the cheapest in the world. This reality, coupled with structural change prompted by the country’s new leadership, could be a good catalyst for a market turnaround.
Adding to stability within China’s GDP growth is strengthening global growth, associated consumer demand, plus an increase in exports. Equally encouraging are
signs of resilience within domestic consumption, based on sustainable growth in household income and more disciplined government investment, reducing concerns about overcapacity.
So with several key developments, none the least being ongoing recovery in developed markets expected to sustain steady growth this year, what stocks do brokers expect to outperform? When TheBull asked a couple of Asia-based analysts to reveals four favoured BUY recommendations, here’s what they came up with:
Karl Shen Research Analyst Fubon Securities (Hong Kong) Limited
1) Credit China (8207 HK)
One of the largest providers of short-term financial services to China’s huge SME market – predominantly in Shanghai - which typically struggles to obtain loans from commercial banks, Credit China’s major businesses include pawn loan/entrusted loan, financial guarantee, financial lease, and financial consultancies. The company differentiates itself with peers through more aggressive lending strategy covered by solid risk management rules, particularly in the use of larger entrusted loans for higher capital utilisation.
While SME financing demand is rising, confidence in obtaining financing is dropping, hence leaving plenty room for lending companies such as Credit China to expand businesses (see table). Shen expects Credit China’s new venture into the micro credit business to become a new growth engine.
The company’s micro credit arm in Chongqing is expanding exponentially, and within a few years is expected to become a major earning driver, while also mitigating the company’s overall risk exposure. Shen is also excited by Credit China’s latest move into a potentially highly rewarding Internet financing arena.
“We expect the next couple of years to be a big time for the sector, and Credit China will benefit substantially if it integrates traditional businesses with internet financing,” says Shen.
While Credit China is currently trading up around Shen’s target price of HK$1.10, his valuation, which is yet to include new Internet financining ventures, already suggests a significant upside.
After slowing down in 2012/2013 due to strategic restructure and allocating more
resources to micro credit and internet financing businesses, Shen expects revenue growth to pick up in the next couple of years as synergies take effect. After delivering 27% and 20% ROE in 2011 and 2012 respectively, Shen expects the company to deliver 12% ROE in 2014.
Despite an increasingly competitive environment in the small/micro loans business, Shen expects Credit China’s experience, and operational prudence to complement the further execution of its expansion strategy, including: Streaming its operational structure, developing strategic partnerships and expanding its micro credit/Internet financining businesses. BUY
2) China Financial Services Holdings (605 HK)
A leading Beijing-based diversified finance service company, China Financial Services Holdings (CFSH), provides integrated short-term financing services for SMEs in China that have difficulty accessing bank loans. Formerly known as K.P.I. Company Limited, CFSH’s main businesses are pawn/entrusted loans/micro credit/financing consultancy and offers lending of RMB5-20 million per loan at an average term of six months and average rate of 1.8-3.5%/month.
CFSH targets the top 20-30% of SMEs with credentials close to banks’ minimum
requirements, plus bank customers who can’t obtain sufficient bank loans
or simply need bridging loans between old and new bank loans.
With only around 5-10% of China’s best SMEs having access to bank loans, Shen says there’s huge potential for CFSH to experience high growth in short-term financing over the next three years, which in Beijing alone require more than RMB200 billion in funding via alternative financing.
“CFSH is very smart in selecting clients / pledged assets, and it targets niche markets or market segments where competition is less fierce,” says Shen
With the third largest share of Beijing’s short-term non-bank financing sector, CFSH plans to become tier-1 short-term financing service provider in over time, which means expanding funding sources, business scope, while also enhancing risk control and service quality.
Even when conservatively forecasting CFSH’s loan book growth within Beijing’s huge short-term financing market for SMEs over the next three years, Shen
still expects it to generate double-digit growth. While the bottleneck for CFSH’s growth potential lies in its limited balance sheet, rather than the market potential, Shen expects CFSH to introduce banks or SOEs with solid government relationships to facilitate its business expansion. At HK$0.64, CFSH is trading at a 36% discount to Shen’s target price of HK0.87. BUY
Jack Gong Analyst Orient Securities (Hong Kong) Ltd
1) Franshion Properties (China) Ltd. (817 HK)
A developer and operator of large-scale and high-end commercial real estate projects in China, Franshion Properties (China) Limited delivered strong core earnings margin
Thanks largely to a decent pricing premium, cheap land cost and sustained rental income, Gong expects Fransion’s gross margin to stay high at over 40% in 2014. “Backed by doubled presales deposits of HK$17 billion, we expect the company’s 2014E core earnings to grow 46% year-on-year to HK$4.3 billion,” says Gong.
He expects the high possibility of Fransion’s hotel spinoff in 2014 to boost the company’s share price significantly. Assuming Guangzhou Nansha presales and Sanya & Changsha P2 land sale are factored in, Gong says it’s likely the company could beat its presales target substantially. Meantime, a possible JV partner for its new Shanghai acquisition should ease investors’ concern on higher operation risk.
The stock currently trades on a 50% discount to Gong’s price target of HK$3.50 which reflects the recent acquisition, a challenging economic environment and growing uncertainty within the property market. “Our price target of HK$3.5 is based on 60% discount to NAV with discount rate of 10.0%, also representing 7.4x 2014 PE and 0.6x 2014 PB,” says Gong.
Franshion remains Gong’s top pick and he expect its high presales growth and hotel spinoff to drive its share price, notably via its expensive land acquisition - while any delay in the high profile hotel spinoff could represent downside risk. BUY
2) CIFI Holdings (884 HK)
Based in Shanghai, CIFI Holdings (Group) is a property development, investment and management business that develops business strategies in line with government policies related to the real estate sector in China. Since its inception in 2000, CIFI has achieved a nationwide geographical coverage and a strong presence in first-tier cities and selected second- and third-tier cities with high growth potential in China.
With property projects in three geographic regions in China - the Yangtze River Delta, the Pan Bohai Rim and the Central Western Region, CIFI’s development projects include residential, office and integrated commercial complexes.
As at 30 June 2013, CIFI had a land bank with total and attributable GFA of approximately 7.65 million sqm and 6.54 million sqm respectively.
CIFI reported 2013 revenue of Rmb11.9 billion, up 46% year-on-year, core net profit jumped 65% to Rmb1.5 billion, core net margin grew to 12.8% from 11.3%, and net gearing was 68% - while cash on hand surged 56% to Rmb7.2 billion.
Having acquired 21 new projects in 2013 with total GFA of 3.8mn sqm, Gong says CIFI is well positioned to deliver a profitable presales performance in 2014, despite growing uncertainty within property markets. “CIFI’s acquisition timing is successful, and agree with its view that the land market will cool down in 2H14,” says Gong.
Considering its 2013 sell through rate of 60-65%, Gong expects the company to beat its 2014 presales target of Rmb22 billion without much difficulty. “According to its pipeline, we expect the company to reach over half of its FY presales in 1H14. We expect its 2014 core earnings to grow 41% year-on-year to Rmb2.1 billion with a core net margin of 13%.
Trading at a 50%-plus discount to his price target, Gong lifted 2014E his NAV to HK$6.1 (from HK$5.8) to reflect recent acquisitions and stronger than expected financial position. However, he has reduced the target price to HK$2.40 (from HK$2.90) on 60% discount to NAV (from 50%) given challenging economic environment and growing uncertainty of property market.
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